Questions and Answers of Foundations Macroeconomics

Would Keynesian or Classical economists be more likely to emphasize the fallacy of composition?
Did Keynesian or Classical economics support laissez-faire policy?
Wesley Mitchell, a founder of Institutional economics, said that to understand the business cycle, a distinction must be made between making goods and making money. All societies make goods. In the
It is unfair, but true, that bad things happen. Unfortunately, to attempt to prevent unavoidable bad things can actually make things worse, not better. How might the above ideas be relevant to how
What is the relationship between GATT and WTO?
Why would a country want to be a most-favored nation? Why might it not want to be a most-favored nation?
Name three reasons economists support free trade.
How are economies of scale, comparative advantage, and trade restrictions related?
How would a credible threat of trade restrictions lead to lower trade restrictions?
Why would a country have trade assistance programs? What makes them difficult to implement?
What are three reasons countries restrict trade? Are they justified?
The U.S. government taxes U.S. companies for their overseas profits, but it allows them to deduct from their U.S. taxable income the taxes that they pay abroad and interest on loans funding
The text presents free trade as advantageous for developing countries. However, in its period of most rapid development, the half century following the Civil War, the United States imposed tariffs on
When the United States placed a temporary price floor on tomatoes imported from Mexico, a U.S. trade representative said, “The agreement will provide strong relief to the tomato growers in Florida
Who has benefited most from free trade? Who has been hurt most by it? Does that match the positions the various groups have about their support for free trade? Which group do economists align
How does the outsourcing of manufacturing production benefit production in the United States?
In some states and localities "scalping" is against the law, although enforcement of these laws is spotty.a. Using supply/demand analysis and words, demonstrate what a weakly enforced antiscalping
In the late 1990s, the television networks were given $70 billion worth of space on public airways for broadcasting high-definition television rather than auctioning it off.a. Why do airways have
Some economists believe minimum wages create distortions in the labor market. If you are an employer and unable to hire the one willing and able to work for the lowest wage, how else might you choose
Draw the supply and demand curves associated with the tables below.a. What is equilibrium price and quantity?b. What is equilibrium price and quantity with a $0.75 per-unit tax levied on suppliers?
Say that the equilibrium price and quantity both rose. What would you say was the most likely cause?
In the United States, say gasoline costs consumers about $2.50 per gallon. In Italy, say it costs consumers about $6 per gallon. What effect does this price differential likely have on:a. The size of
The textbook model assumes that individuals have enough knowledge to follow the economic decision rule.a. How did you decide what college you would attend?b. Did you have enough knowledge to follow
What is the difference between normative and positive statements?
Knowledge is derived from a tautology when something is true because you assume it is true. In this chapter, you have learned the conditions under which supply and demand explain outcomes. Yet, as
Do you think consumers make purchasing decisions based on general rules of thumb instead of price?a. Why would consumers do this?b. What implication might this have for the conclusions drawn about
Some economists believe that imposing international labor standards would cost jobs. In support of this argument, one economist said, "Either you believe labor demand curves are downward-sloping, or
Why does sales volume rise during weeks when states suspend taxes on sales by retailers? Demonstrate your answer graphically assuming that the retailer pays the tax.
You’re a commodity trader and you’ve just heard a report that the winter wheat harvest will be 2 billion bushels, a 40 percent jump, rather than an expected 30 percent jump.a. What would you
In “Christianity and Economics: A Review of the Recent Literature,” economist John Tiemstra states, “Taking good to mean self-perceived happiness derived from economic consumption adopts an
Your textbook points out that GDP fails to recognize much of the work done in the home, largely by women. Most estimates assign that work great economic value. For instance, one measure, developed by
Austrian economist Murray Rothbard has argued that government intervention during 1929 made what could have been a 1-year recession set off by the stock market crash into a 12-year depression. He
The Genuine Progress Indicator is an alternative measure to economic activity.a. Is the Genuine Progress Indicator a subjective measure of the economy? Explain your answer.b. Is GDP a subjective
When is the multiplier model more appropriate: for small or large changes in aggregate demand?
Traffic engineer Hans Monderman has shown that traffic flows can be made safer and flow better if the number of road signs is reduced and, in many types of intersections, eliminated altogether. What
According to Keynesians how could the economy’s output deviate from its potential?
In the 1950s, Michael Hubert King, an oil geologist, mathematically determined that when 50 percent of oil reserves have been extracted, annual oil output would inexorably decline. He looked at the
What are induced and autonomous expenditures at point A in the accompanying graph? 4,000 3,000 AE 2,000 1,000 Real income Real expenditures 1,000 2,000 3,000 4,000
The president returns to you and tells you that instead of changing taxes, he wants to achieve the same result by increasing government expenditures. What policy would you recommend?
During the Great Depression, Norman Cousins made the following remark: "There are approximately 10,000,000 people out of work in the U.S. today. There are also 10,000,000 or more women married and
Why might deflation be a problem for an economy?
Post-Keynesian economist Hyman Minsky predicted many of the problems that have recently befallen the U.S. economy. Given that he was right and conventional macroeconomists were wrong, why do
What happens to the aggregate expenditures curve when autonomous expenditures fall?
When the federal government uses expenditures to stimulate the economy, it changes not only the present but the future as well. Use the AS/AD model and the production possibility curve to explore the
Why does the paradox of thrift suggest that government needs to intervene in a recession?
Draw an AS/AD diagram from the Keynesian viewpoint. Assume the initial equilibrium in your diagram is just at the level of potential output. Then reduce the level of aggregate demand in your diagram.
One remarkable thing about U.S. households is how little they save. The U.S. personal savings rate through the first five months of 2007 was negative. This negative savings rate seems to be the
Are inventories building up at levels of output above or below equilibrium output? Explain your answer.
Coaxing spending out of the private sector, especially investment spending, has never been an easy matter. What persuades investors to part with their money? Economist Stephen Fazzari provided one
What happens to equilibrium income when the marginal propensity to expend rises?
What is equilibrium income if the aggregate expenditures function is AE = 300 + .4Y?
What are two factors that cause the SAS curve to shift?
Congratulations yet again. You’ve just been appointed chairman of the Council of Economic Advisers in Textland. You must rely on your research assistant for the specific numbers. He says income is
If the multiplier model multiplies the effect of initial changes in autonomous expenditures, how can it also be a model of dampened fluctuations?
How does the permanent income hypothesis affect the multiplier model? Why?
Capitalism was a derogatory term coined by Karl Marx to deride the riches of those who accumulated capital. He said that the accumulation of capital helps the rich get richer while simultaneously
Outline some of the benefits and costs to society when it experiences growth.
Ecological economists believe that economic possibilities are constrained by natural laws (for example, the laws of thermodynamics, biological assimilation, and the limiting factor). Unlimited
Many Keynesians believe the best way to deal with growth is to have government promote an industrial policy that focuses on the development of technological change using tax credits, government
There is a furious debate among economists about the relationship between equality (or inequality) and economic growth. Based on the observation that developing countries often experience increasing
Who most likely worked longer to buy a dozen eggs: a person living in 2017 or a person living in 1910? Why?
Christians believe that everything ultimately belongs to God. Is that belief consistent with economists' belief that property rights are necessary for growth? (Religious)
On what law of production did Thomas Malthus base his prediction that population growth would exceed growth in goods and services?
Classical growth theory and new growth theory both contribute to economists’ understanding of how the sources of growth lead to economic growth.a. How are they the same?b. How do they differ?
What are spillover effects and how do they affect growth?
What are network externalities and how do they lead to growth?
In the early 20th century worker productivity in the Horndal iron works plant in Sweden increased by 2 percent per year over a 15-year period even though the firm did not invest in new capital. What
England once offered a prize to the person who invented an accurate clock that could be used on a ship. England then made the technology freely available. Do such policies lead to greater growth than
Money is to the economy as oil is to an engine. Explain.
If the government prints new $1,000 bills and gives them to all introductory students who are using the Colander text, who incurs a financial liability and who gains a financial asset?
If dollar bills (Federal Reserve notes) are backed by nothing but promises and are in real terms worthless, why do people accept them?
The U.S. government has a monopoly on U.S. dollars.a. Could money be supplied privately?b. Has money ever been supplied privately? If so, how do you suppose people knew its value? (Austrian)
About 30 U.S. localities circulate their own currency with names like “Ithaca Hours” and “Dillo Hours.” Doing so is perfectly legal (although by law they are subject to a 10 percent federal
The Federal Reserve’s Board of Governors is arguably the most powerful policy-making body in the United States.a. Since its inception, how many women have served on the Board of Governors?b. What
Economist Michael Bryan reports that on the island of Palau, the Yapese used stone disks as their currency. The number of stones in front of a person's house denoted how rich he or she was.a. Would
Joe, your study partner, has just said that, in economic terminology, when he buys a bond he is investing. Is he correct? Why?
In Institutional economists’ view, money not only serves as a medium of exchange, a unit of account, and a store of wealth; it also operates as an idea that shapes human understanding and
For each of the following, state whether it is considered money in the United States. Explain why or why not.a. A check you write against deposits you have at Bank USA.b. Brazilian reals.c. The
U.S. paper currency is made with several features that are difficult to counterfeit, including a security thread, color shifting ink, micro printing, a portrait, a watermark, and a fine-line printing
The chapter talks about the role that depositors and banks play in the "creation" of money.a. Do you think this role is consistent with the view that the money supply is only determined exogenously
What function is money serving when people compare the price of chicken to the price of beef?
How does inflation affect money’s function as a store of wealth?
While sharia (interest) is banned in Islam, profit sharing is not. An Islamically sound banking practice could be a system in which depositors deposited money under a principle of profit sharing and
What are two components of M2 that are not components of M1?
Categorize the following as components of M1, M2, both, or neither.a. State and local government bonds.b. Checking accounts.c. Money market accounts.d. Currency.e. Stocks.f. Corporate bonds.
State the immediate effect of each of the following actions on M1 and M2:a. Barry writes his plumber a check for $200. The plumber takes the check to the bank, keeps $50 in cash, and deposits the
Explain in words why the present value of $100 to be received in 10 years would decline as the interest rate rises.
A 6 percent bond will pay you $1,060 one year from now. The interest rate in the economy is 10 percent. How much is that bond worth now?
Assuming individuals hold no currency, calculate the money multiplier for each of the following reserve ratios: 5 percent, 10 percent, 20 percent, 25 percent, 50 percent, 75 percent, 100 percent.
If the U.S. government were to raise the reserve requirement to 100 percent, what would likely happen to the interest rate banks pay on deposits? Why?
While Jon is walking to school one morning, a helicopter flying overhead drops a $100 bill. Not knowing how to return it, Jon keeps the money and deposits it in his bank. If the bank keeps 5 percent
True or false? Policy makers in practice use the money multiplier to determine the amount of reserves needed to achieve the desired money supply. Explain.
If financial institutions don’t produce any tangible real assets, why are they considered a vital part of the U.S. economy?
The financial sector channels saving into spending.a. What is the risk of the financial sector expanding the spending flow too much?b. What kept this from happening in the United States in from 2000
State whether the following is an example of the transactions, precautionary, or speculative motive for holding money:a. I like to have the flexibility of buying a few things for myself, such as a
If people expect interest rates to rise in the future, how will they change the quantity of money they demand? Explain your answer.
In what market are short-term interest rates determined?
Fisher Black, an economist who designed a famous options pricing model, argued that because of developments in financial markets, central banks would soon have no ability to control the economy with
The quotation at the beginning of this chapter, and those for almost all the chapters, is from a man not a woman.a. Does this suggest anything about the author's viewpoint or about the economics
Monetary policy is difficult when interest rates are low. For example, in the early 2000s the Bank of Japan lowered the interest rate to 0.01 percent with little effect on investment.a. Why is it

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